July 2008

1) The price of gold and the Dow Jones will reach parity between 4,000 and 5,000 (i.e., gold will trade between $4 – 5,000 as does the Dow Jones Industrial Average).

2) America’s sovereignty, as defined as percentage ownership of American financial assets, principally U.S. government bonds (soon to no longer be rated AAA), will be mostly in the hands of foreigners.

3) China will buy Fannie Mae and Freddie Mac and in so doing become America’s biggest land lord.

4) Very few of the current Bush administration, family, and close associates will be living inside U.S. borders within 6 months after leaving office.

5) The Presidential election in November will be delayed due to a global financial crisis.

6) The U.S. military in Iraq and Afghanistan will start to run out of money and be left to get out on their own resulting in American mercenaries hiring groups like the Taliban to escort them out of the region, with Bin Laden getting a commission on each deal.

7) Russia will emerge as the new power broker in a post-America world restoring financial order between America, the largest debtor in the world and China, the largest creditor in the world.

…to read the entire mind-boggling, must read article titled “The Black-Scholes Atomic Debt Bomb & 7 Predictions” please click HERE

Peter J. Cooper, a Dubai based economic journalist, has recently posted an excellent analysis of why and how to make the best of the coming (and rather overdue) junior mining shares price explosion.

Here’s some appetising excerpts.

The big gold and silver producers are preparing to unleash a round of bidding for junior exploration companies that will bid up the value of the whole sector, and stocks that are good, bad and indifferent will jump in value. You have been warned. Now is the time to buy. It is so obvious with gold and silver prices on the march…

Gold and silver equities have been disappointing performers over the past couple of years. Cost inflation has dented profit margins for the big producers, and capacity expansion has been subject to delays. But these fears may have been overdone, and rising precious metal prices will now begin to feed straight through to the bottom line.

Market anomalies are how investors make big profits. The price of silver is another example of a market anomaly, as this column argued last week. Silver has underperformed every other metal, except gold in this commodity price boom and yet its supply and demand situation is arguably the weakest of all.

So if you want to hedge your position in the junior explorers with a second opportunity to achieve leveraged performance to the rise in price of the underlying metals, then again silver stocks are to be recommended. The smaller companies might well deliver the best performance but unless you want to deeply diversify you could stick to the bigger names.

Please click HERE to read P.J. Cooper’s analysis titled “Time is running out to buy junior exploration stocks” while the junior shopping season still lasts…

A financial planner from Chicago, Marcus C. Rodriguez, has written a wonderful letter to the U.S. Commodity Futures Trading Commission documenting the manipulation of the price of gold on U.S. commodities exchanges and urging that the commission compare that manipulation with the huge gold derivative positions held by JPMorganChase, Bank of America, and Citibank.
It could only help if other Americans wrote to the CFTC in support of an investigation of the issue Rodriguez has raised.
You can find Rodriguez’s letter to the CFTC HERE
MineWeb chief Lawrence Williams speculates that central banks may attempt major sales of gold to support the fading U.S. dollar — an acknowledgement that central banks undertake to sell gold not to diversify their reserves or relieve themselves of the expense of storing a supposedly dead asset, long their cover stories, but to manipulate the currency and government bond markets…

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Possibility of big Central Bank gold sales to help try and stabilise the dollar

The prospect of new Central Bank sales of gold to try and contribute to dollar stabilisation is likely to be under consideration. Will this happen, and, if it does, what will be the likely effect on the gold market?

Author: Lawrence Williams
Posted: Thursday , 17 Jul 2008

Following various pronouncements in Washington and elsewhere there seems little doubt that moves are being discussed to try and halt the greenback’s seemingly ever-spiralling downturn now that the Fed is beginning to concern itself with inflation. This may just mean US interventions in the markets to buy dollars, but could also be the prelude to some concerted sales of gold into the market as higher gold prices are themselves seen as an indication of dollar devaluation (which indeed they are) and so the feeling among some Central Bankers is that a gold sell-off will in turn help stabilise the dollar.

This may well occur. Be warned. There are enough gold disbelievers in the sector to make it happen. But one suspects it will be of little use in the medium to long term. The U.S.’s economic malaise cannot be halted by selling the best indicator out there of dollar weakness. The weakness goes far deeper structurally into the American dream which up until the second half of last year had been boosted by virtually unlimited credit, a significant proportion of which was being taken up by those who could least afford to repay it in a downturn. Unfortunately the American dream has de facto become a global dream as the world’s economic powerhouse has aggressively exported its ideas of capitalism (behind the smokescreen of democracy) all around the world – sometimes by force where it has seen its economic interests and security threatened.

The banking and investment sector – particularly the former – has to take a huge amount of responsibility for what has occurred. Traditionally an ultra-cautious sector, this caution seems to have been thrown to the winds in the name of ever increasing profits as enormous sums of money are moved around and where even a fraction of a percentage turn on which is worth billions of dollars. Perhaps the problem is that investment banking these days is largely populated by the young and overly-aggressive, dazzled by riches beyond belief and corresponding greed, with corporate bonuses running into sums which seem to exceed the GDP of some countries! Most of all they are those who have no prior experience of a really serious downturn.

The culture is alarming to the person in the street who only earns a tiny fraction of the kinds of sums available to those with few scruples and mega incomes and who may look down with disdain on those who have not selected careers which can generate such extremes of wealth.

Perhaps this is a little unfair and is only painting a picture of the extremes in the sector. There are still plenty of traditional conservative bankers around who are probably just as horrified at some of those they have to rub shoulders with and whose warnings have gone unheeded. They are taking command now and some of their cautions in dealings with fellow banks are perhaps at the root of the credit crunch which means that almost all risk elements have to be removed before loans – corporate and personal – are approved.

But there is still a debt mountain out there and credit card issuers have to be the next area where some financial collapses have to be on the cards as more and more individuals default on credit card debts – a worrying parallel with the mortgage defaulters who have dominated the analyses so far and who have precipitated runs on banks and savings and loans (building societies to us Brits).

But we digress. Will the bankers sell gold to try and reverse the dollar slide? And if they do will it make any serious difference to the gold price, or the dollar, anyway? Short term negative gold price impacts may result, but overall the fundamentals behind the dollar weakness cannot be undone by such an artificial procedure. Indeed if such sales are made openly, and the gold price is not significantly affected, which has to be a possibility, then the dollar may be seen as being even weaker still.

What is likely to be the dollar saviour in terms of currencies like the Euro and perhaps the Yen, is that the US has very successfully exported many of the problems it is currently facing to the Euro zone and elsewhere and only now is the true impact of the financial crisis in these areas beginning to sink in. We are seeing housing price collapses in some European countries – the trigger behind the US downturn – and as the US economy begins to stabilise, which it probably will, the downturn is beginning to get under way elsewhere and other economies will weaken. That may be what truly halts the dollar slide.

Another factor which could impact the dollar positively, and gold negatively, is a bursting of the oil price bubble. Gold has moved up with the oil price and it may move down with it too until it eventually is likely to decouple and find its own way. This has already been seen in the past couple of days and something we warned about here only a couple of weeks ago. See: Is gold too low compared with oil – or is it that oil is just too high?

Although Paul Walker of GFMS recently told Moneyweb/Mineweb his research group is not seeing a decline in gold production worldwide, it is not seeing an increase either which would seem strange given the big rise in the gold price over the last few years. Indeed it would appear that the gold mining sector is facing difficult times and if the returns are not there we are going to see production decline anyway. It’s a fine balance between price and production and with bankers being over-cautious with their loans we are certainly going to see a number of what would have seemed to be probable new gold mine developments and expansions curtailed, deferred or postponed indefinitely.

This alone would help mitigate the impact of any Central Bank sales, while the investment take-up of physical gold through ETFs has become an almost overnight phenomenon. It is again becoming respectable (and much easier) to hold a direct investment in gold bullion and with more and more institutions beginning to recognise the value of holding gold as part of a balanced portfolio there is likely to continue to be growth in this sector of the market.

So, should Central Banks sell gold to try and help stabilise the dollar, apart from some short term dips around the gold sales themselves, it is likely the markets will absorb whatever is thrown at them. This would be either through a decline in production and continuing increasing investment demand, not to mention some likely purchases by some central banks which a) believe in gold and b) feel they need to hold more of their foreign exchange reserves in some currency other than the US dollar – and in this respect gold definitely counts as a currency.

While there may be a negative impact in that gold might not move upwards as fast as some would predict, longer term fundamentals look good for gold and with economic instability likely to continue for some time one has to remain positive on the price.

In a 60 page Special Report on gold, Austria’s Erste Bank analyst, Robert Stoeferl reckons that in spite of the recent correction the yellow metal “remains in a secular bull market and that the positive fundamental outlook will not change a lot over the remainder of the year and beyond.

With seemingly massive support seen around the $850 level, the report suggests that the price will remain in the $850-$950 band during the summer months with the $1000 mark being clearly passed again later in the year. Passing $1200 is seen as the first target and in the long run the price is seen as passing the inflation-adjusted all-time high of $2,300.

As if to place emphasis on the remonetisation aspect of gold, Stoeferle concludes his report with the J.P. Morgan Satement to the U.S. Congress in 1913 – “Gold is money, and nothing else“.

To access the 60 page Gold Report, please click HERE

By Peter Brimelow
Monday, July 14, 2008

NEW YORK — Gold surges, but sentiment is soggy. The goldbugs smell a breakout, and this time they may have generalist backers.

Gold’s performance last week was remarkable. Losing $10.30 on Comex in the first two days, it then turned round to add $27 on the week and $46 from Tuesday’s intraday low, closing at $960.60 an ounce. Volume was extremely heavy. SPDR Gold Trust (GLD) added 45.99 metric tons of gold to its holdings on Friday, possibly its biggest daily increase, taking it to a record level.

Sentiment started the week low and apprehensive. LeMetropole Cafe’s Bill Murphy remarked early on Friday: “It is remarkable to me how the Cafe Sentiment Indicator, a barometer of interest in gold and silver by the general public, continues to be a predictor of upwards precious metals price action. Tuesday, Wednesday, and Thursday of this week were collectively the worst three days in the last 10 years for that indicator. … How typical, with that sort of terrible bullish sentiment, that this morning we are walking in to the most buoyant Comex pre-market upward gold price action that I can recall.”

Murphy’s Cafe Sentiment Indicator is proprietary, but it is believed to be heavily weighted to how many sign-ups this subscription site gets.

Despite the strong week, sentiment did not much improve. MarketVane’s Bullish Consensus for gold rose only 4 points, to 82%. (In February-March it spent 19 business days in the 90s, peaking at 95%.)

And neither the Philadelphia Gold and Silver Index (XAU)nor Amex Gold Bugs Index (HUI) recovered to the level they were at on July 1, when Comex gold closed at $944.50.

Nevertheless, the more sophisticated gold bugs are excited. Dan Norcini, the respected technical commentator who posts on gold daily on Jim Sinclair’s MineSet Website, pointed on Friday to “the importance of today’s technical breakout. … This is occurring against a backdrop of normal seasonal weakness which makes the move all the more impressive. … Most noteworthy today was the action of the bond market … with bonds tanking alongside equities as safe haven flows made their way into gold.”

Australia’s The Privateer noticed the same thing: “Normally, in times of fear of incipient financial meltdown, U.S. investors stampede into Treasuries as a ‘safe haven.’ That didn’t happen on Friday, July 11. In fact, the opposite took place. … The 10-year paper, for example, saw its yield increase by 17 basis points — the biggest one-day jump since March 24.”

The Privateer’s paramount $US 5×3 point and figure chart looks extremely handsome. As its proprietor says, “We now have a ‘breakaway gap’ on this chart”:


As one of Le Metropole’s contributors wrote, “Gold’s friends are spoiled for choice, with excellent geopolitical, financial structure, and monetary arguments for a strong metal price.”

Unfortunately for me, I remember the 1970s. Not just the late ’70s, but the 1973-4 equity bear market, in real terms as bad as the 1929-1933 crash.

In late 1974, gold shares had a huge run — in fact, by some measures the biggest ever proportionately. The standard explanation was that shares were being bid up ahead of the legalization of American ownership of gold, banned since the 1930s, which became effective Jan. 1, 1975.

But perhaps as important was the desperation of generalist managers to find something on the long side that worked. Something similar applied in 1979, although the market precursor then was stagnation rather than decline.

What happens if profit-starved generalists and momentum players wake up and take notice?

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GoldMoney founder James Turk, editor of the Freemarket Gold & Money Report and consultant to GATA, analyzes the U.S. government takeover of IndyMac Bank and concludes that the value of sub-prime and Alt-A mortgage debt still in the U.S. banking system is less than 50 percent of book value.
This implies that government insurance of bank deposits can’t handle the problem without massive money creation. Turk’s new analysis is headlined “America’s Second-Biggest Bank Failure” and you can find it in the “Founder’s Commentary” section in the third column of the GoldMoney home page HERE

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